Is this real tax reform?

One of life’s certainties, other than death and taxes, is that all Governments indulge in spin. The challenge is working out where facts taper off and at what point the art of persuasion begins.

Accepting the inevitability that the Gillard Government’s proposed Carbon Tax will pass into law later this year, advocates for a simpler, fairer taxation system have a responsibility to argue for policy outcomes that match rhetoric.

That’s why we have to make it clear that the one thing this policy is not is major tax reform.

It is more like a re-working of parts of the tax system that amounts to a series of adjustments around the edges.

Increasing the tax-free threshold to $18,201 from July 1 next year is the headline-grabber. This equates to an effective tax free threshold of $20,542 – an increase of not much more than 25 percent over the current $16,000 threshold – which is hardly the tripling that some are claiming.

There’s something to be said for the changes removing about a million Australians from the tax system and it was a direction laid out in the Henry Review. It’s a good thing to remove the need for these people to file a tax return. Under the Henry plan, however, the low income tax offset was to be abolished in an effort to make the system simpler.

We still have four income tax thresholds rather than the simple two preferred by Henry. The point at which people move between the thresholds, and hence the tax rates, is what causes distortions in the effective tax rate. This is compounded by any withdrawal of government assistance as people return to the workforce.

These changes have been billed by the Government as delivering “a simpler, more transparent personal tax system.”

In reality, little has changed. The changes are neither simple nor transparent and the package relies heavily on the tax transfer system to compensate low income earners.

That’s why it’s essential the Government seize the moment and lay-out the scope for its planned October Tax Forum. Expand it from a two-day interlude to make it a centrepiece of a true tax reform agenda.

Focus on carbon tax implementation but cast the policy net wider. Give teams of policy experts well-defined briefs in advance, to come up with reform proposals that benefit the whole system.

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